The crypto market is a volatile and often unpredictable place. Identifying the perfect moment to buy digital assets is a challenge, even for trading professionals.
If you are looking for less stressful ways to invest in the cryptocurrency market, dollar cost averaging could be the solution you need.
It is one of the most popular ways of investing, that disciplines traders, eliminates emotional purchasing, and increases your chances of maximize your long term returns.
What Is Dollar Cost Averaging?
Dollar cost averaging is a simple investment strategy in which you invest a consistent amount of funds into the same asset at regular time intervals.
The key belief behind the DCA strategy is the idea that all assets tend to increase in price over time, however, across shorter time frames, they experience a range of ups and downs. Therefore, finding the perfect moment to enter the market is not an easy task, even for professionals, let alone inexperienced investors.
Dollar cost averaging focuses on long-term holdings and eliminates the need to seek the perfect window in which to buy the dip.
Accordingly, it lowers the impact of price fluctuations and helps traders to avoid painful mistakes such as buying too many assets at an overstimulated price or, on the contrary, too little when they are notably cheap.
The DCA method allows investors to lower the average cost of their investments over time, meaning that they lose less in the event that the asset’s price drops, but will generate higher returns when the assets’ price grows. Historically, regularly-made investments have typically led to higher returns in long run.
How Dollar Cost Averaging Works
When dollar cost averaging, you enter the market at regular time intervals to perform the same action; spend the same amount of money on buying the same asset.
What differs whenever you make the purchase throughout this method, is the price of the asset itself.
Let’s say you have $500 and wish to spend it in equal installments across 5 different months. By using the DCA method, this means you’ll be making five separate $100 purchases on the same day, each month.
As you know, price charts do not sit still and asset prices are in constant flux, so each time you buy, you do so at a different level. This means that the amount of a given asset that you’ve acquired varies accordingly.
When the price is higher, you obtain fewer units of the asset for your $100, but on the other hand, when its price drops, $100 nets a larger portion of assets.
Simply put, this means you get more assets when the market is at a low, and fewer assets when the market is experiencing a high.
What Are the Benefits of the DCA Strategy
- Psychology is a major factor when making investment decisions. Even the most experienced of investors succumb to sentiments of fear and greed, increasing their portfolios when prices go up, or selling when prices fall. Dollar cost averaging protects traders from making emotion-based decisions and reduces investment risk.
- Dollar cost averaging brings discipline. This means lower risks, and lower expenses.
The strategic placement of an investment at the right time is very important in the cryptocurrency market, and getting it wrong can be costly. Using the DCA strategy protects traders from entering the market at a bad time which could otherwise significantly hurt an investment portfolio.
- Dollar cost averaging helps traders to manage and minimize investment costs, which could increase were they to begin buying and selling crypto more often than they had initially planned and budgeted for.
- Funds are invested at all times. Unless to make the regular DCA purchases, traders are not left waiting for the best time to buy assets, nor is any money left idle, or worse, lost. Instead, the regular investments start working the moment they are placed. Otherwise, money in a trader’s bank account waiting for the right time would not be working towards anything and could even lose its value in times of inflation.
- Anyone, even those with as little as $10 for investments, can simply start with a DCA plan. The strategy does not require specific investment knowledge or any particular or deep research to identify entry windows. Dollar cost averaging is one of the easiest investment strategies to perform, even for complete beginners.
What Are the Risks of Dollar Cost Averaging?
- The cryptocurrency market is highly volatile and unpredictable. Sometimes even a single tweet from an influential person like Elon Musk can take an asset’s price to all-time highs. There is no guarantee that the DCA strategy will always work, especially at a time when markets are in decline.
- Dollar cost averaging lowers the risk of losses when asset prices drop, however, it does not completely protect traders from price falls. If a market crash continues for an extended period, losses also continue to pile up.
- DCA is not a replacement for the fundamentals and research. Adopting the DCA strategy does not guarantee that any asset is a good investment by itself. Always carry out your own research before choosing which cryptocurrency to invest in.
- DCA is a plan for long-term investments. If you are looking to make a quick profit, dollar cost averaging may not be appropriate for your needs.
- With lower risk comes lower returns. Bull markets might shoot up and prove to be highly beneficial for those who invest everything at once, but in such a bull market, DCA investors would only place orders in increments. This means that some of those purchases would be made at a higher price, which would likely then result in lower gains at the end.
How to Start Dollar Cost Averaging
If you are new to crypto, your first priority should be to find an asset you would like to invest in. There are thousands of cryptocurrencies on the market to choose from, but always perform due diligence, some of these will simply be scams.
It is necessary to do your own research before investing. Study the coin, its whitepaper, use cases, tokenomics, team, and its community to understand the bigger picture and the coin’s potential.
The second task to undertake is to sign up and open an account on a cryptocurrency exchange. Registering on crypto exchange is completely free-of-charge that won’t take much time, and will provide you with a gateway to buying digital assets.
Once you’ve created an account, you’ll need to deposit funds. Most of the top crypto exchanges accept bank transfers and direct top-ups via credit cards.
Once your crypto account has the necessary funds, check if there is a trading pair of your chosen crypto and fiat. If not, you can exchange your fiat deposit into a stablecoin such as USDT, or USDC, and then use this to place a buy order for the crypto of your choice.
Last but not least, set up a cryptocurrency wallet to store your digital investments. Of course, you could keep your holdings in the custodial wallet of the crypto exchange, however in this instance you would not be the sole owner of your private keys, and in the event that the exchange suffers a hack, you would be at risk of losing your assets.
Related: How to Buy Crypto Properly
Why You Should Care
It is impossible to know where the market will go next, especially in such highly volatile markets as crypto. With dollar cost averaging you purchase assets in smaller amounts, regardless of their price levels. This makes investing a simpler process, and helps to maximize the chances of lower long term average investment prices.